Employee or Contract? What you need to know!

In seeking a new role, after filtering opportunities to my focus and desired role, there are then typically two categories to choose between: employee or contractor.

If you have never contracted, you might not be aware of some of the considerations in choosing to do so. I will lay some of them out.

I'm not going to delve into the soft considerations that relate to the working environment and other preferences that are subjective. I'm focusing on the major objective points: financials, tax obligations and stability.

In my case, approximately 50% of my time doing web work has been as an traditional employee, and the other half as a contractor, and I don't feel that one is better than the other by default. As with most things: it depends.

I won't discuss the employee part of the equation, since most folks are familiar with that. So let's take a look at what being a contractor means.

W2, 1099, or Corp-to-Corp (C2C, B2B)?

Whether you are looking at a simple contract opportunity, which is to wave bye-bye at the end of it, unless both parties want to extend it, or a contract-to-hire project, where the expectation is that you will convert to being a normal employee at some point, what you will notice in the job description is it being classified as W2, 1099: or some descriptor meaning corp-to-corp, which is also 1099, but a more specific requirement.

W2 - you will be hired, most likely by the recruitment company. The W2 is the tax form sent to you after the end of the calendar year that is used to file your tax return.

1099 - you will be independent...not an employee. The 1099 is the tax form that is sent to companies rather than a W2. More on this in below.

Corp-to-Corp - This also results in a 1099, but this requires that the 1099 is being sent to a corporation, as recognized by the IRS, and not a 'sole proprietor' such as you doing business simply under your own name.

There are some options in terms of being a 'corp.' You could create a standard corporation, known as a C-corp. You could, instead, create a LLC, Limited Liability Corporation. If you are contracting as an individual with no parters, etc., back at your office, the simplest approach could be to create a single member LLC. When it comes to tax time, the net revenue or loss (after expenses) of the LLC flows through to your normal tax return. If you are considering moving forward as 1099, it would make sense to consult with a tax professional.

Stability

I might point out that a contract can be canceled at any time, for example if the project goes away because of a decision upstream from the project owner. That said, 49 of the 50 states are at-will states, which means that employment can be terminated at any time with no reason required, so long as it isn't discrimination of a protected class.

the Financials

I realize that up to now this reads as a coin flip, and it very well could be. However, there is one additional difference between W2 and 1099 that does not typically result in a coin flip, and that's compensation.

Let's get the benefits out of the way first. Note that the following applies if you are contracting as a 1099, but does not necessarily apply if you are contracting as a W2. In the case of the recruitment firm hiring you as a W2, what benefits you receive can vary.

As a 1099 you are considered an employee of somebody else. Therefore, it is expected that your benefits are provided by whoever is employing you, which likely is yourself. So what does NOT come your way from the project owner when compensating you as a 1099?

• Taxes
• Vacation
• Holidays
• Health benefits
• Perks

Aside from evaluating the opportunity in terms of the work to be done, duration, timing and other things you would also consider if looking at an employment opportunity, the biggest decision you will need to make is the rate you request.

A common mistake is to come up with a rate by taking what you were making as an employee (or would want to make as an employee) and dividing it into an hourly rate. But why? Because there are expenses that you will incur as a 1099 that you would not as an employee, and they are very easy to overlook...and very costly should you overlook them:

• Taxes - nothing is held back from your check to pay taxes. You need to put those funds aside. In fact, you will almost certainly need to make quarterly payments to the IRS (Estimated Tax payments), otherwise you will have interest and penalties assessed by them against you, and those are not trivial. Additionally, when you are an employee, a portion of the Social Security and Medicare tax from each paycheck is paid by the employer. As a self-employed individual, this is not the case, You will most likely be paying that portion, which is typically an additional 7.65% of the gross amount you receive.
• Vacation - when you are a 1099 no one pays you to take time off. Sure, you can choose to take a week's vacation, but you're not getting paid while you're on vacation. If you take 10 days off a year, that is lost income.
• Holidays - typically you are not expected to work (often not allowed to work) on a holiday on which the business to which you contract is closed. That's great! You still get holidays off. However, while their employees are being paid for those days, you are not.
• Health Benefits - nope. If you want health benefits, you will need to provide your own or be a dependent on someone else's.
• Perks - while companies who use contractors sometimes invite them to company events, more often you will not see any of the perks. That said, in my case I consider sometimes working from the couch, my choice of food and beverage always available, and it always being a bring-my-dog-to-work day as huge perks!

WIth regard to taxes, vacation, holidays and health benefits, the thing that is often overlooked is this: each of them reduces your income. Let's look at an example.

Bill was earning $100K as an employee, and wants to earn the same as a contractor. The easy math, rounded off, is:

$100,000 at 2,080 hours in a year* = $48/hour (*2,080 is the standard number when not factoring in vacation and holidays).

TAXES: There is a cap on Social Security tax, but not until you hit $176,000 (as of 2025), so: $100,000 x .0765 = $7,650, which is just the amount an employer would normally cover.

VACATION: Using 10 days for this example: 10 x 8 hour days x $48/hour is $3,840 not earned while enjoying that vacation.

HOLIDAYS: If the company for which you are doing work closes 10 days per year, that is the same amount as above, so $3,840 you are not earning while having the holiday off.

HEALTH BENEFITS: Let's say you were paying $100/month while employed for your coverage, and let's say that you could get the same policy at the same group rate (very unlikely, so consider the amount we come up with as a low-ball example), keep in mind that on average employers pay 83% of the premiums on an employee's health plan. So the math here would be: $100 ÷ 17% x 83% = $488.24/month (the part Bill was paying) = $5,858.88/year that Bill would have to be to cover what would normally be the employer's share.

So where does that leave Bill? Keep in mind we are not considering the income tax he has to pay, only the additional amounts. Going back to his original rate, at the end of the year, his net income would not be $100,000, but $78,811.12.

In order to actually have $100,000 before paying the tax one would typically pay as an employee, instead of $48/hr the rate would need instead be $58.26/hour.

One final note, and this is an intangible that I ran into that can absolutely lay waste to all of the numbers: your planning can only hold true if you end up working the number of hours on which you base your calculations. The gotcha is when a project reaches completion, if it takes you two weeks to find another, and two more weeks to be onboarded, you've lost 160 hours of income! It's essential that you start looking for the next project weeks in advance!

I wish I had this information available the first time I took a 1099 contract position! I hope you find this information useful. With the proper planning, and given the needed flexibility in the available rate for you to account for the additional costs and still hit whatever target you require, contracting can be a rewarding experience.